A tale of two watchdogs: Bringing the bank bailout to heel

Commentary: Warren, Barofsky aren't rolling over for administration

WASHINGTON (MarketWatch) -- The congressional watchdogs for the bank bailout bared their fangs this week and actually showed a little bite instead of just bark.

The Congressional Oversight Panel, chaired by Harvard law professor Elizabeth Warren, held its first hearing with Treasury Secretary Timothy Geithner. Since the panel has no subpoena power, it is dependent on the good will of witnesses to appear.

Geithner responded to questions from the five-member bipartisan panel with what is becoming his trademark double-talk. See full story.

When asked about a specific bank -- Citigroup
C, -1.01%
-- he replied that his "responsibilities" precluded him from talking about individual institutions. When asked about stress tests for banks in general, Geithner said the bank regulators were handling that case-by-case -- which of course he couldn't talk about.

When asked about a specific policy, he almost invariably started with something like, "Let's recall our objectives here," and ended with words to the effect, "Trust me, we'll do whatever it takes to achieve that." Yada, yada, yada.

You can listen to the Treasury secretary talk for hours like this and learn very little. The stock market seized on his bromide that the vast majority of banks are capitalized well enough to stage a sucker rally in financials.

Of course they are well capitalized -- regulations require them to be. The question is whether some of our very biggest banks have sufficient capital to sustain the inevitable losses from their toxic assets, and this is the question that the administration and the Federal Reserve continue to skirt.

But at least Geithner was out there, squirming in his chair and giving his evasive answers for all to see. Warren, a longtime nemesis of credit-card issuers because of her consumer advocacy, has gone on a media blitz in the past few weeks to get a hearing for her otherwise toothless panel.

She confessed to Jon Stewart last week on the Daily Show that without subpoena power all she could do was use the panel as a bully pulpit to talk about the issues -- but that she would at least do that.

A watchdog with teeth

However, the other bailout watchdog, Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, does have subpoena power and the authority to launch criminal investigations. These are tools that the former assistant U.S. attorney in New York, often described as a "prosecutor's prosecutor," clearly relishes. He already has started 20 criminal investigations and six major audits, according to the report he issued this week. Read the report.

Noting that TARP, which Barofsky interprets to include all the related Federal Reserve bailout efforts, is unprecedented in its scope and could reach $3 trillion under existing plans, the report says the bailout offers massive opportunities for fraud and conflict of interest. In his 250-page report, he details potential risks and recommends specific measures to mitigate them.

The initial six audits include probes of what procedures Treasury used in channeling the initial TARP funds, the banks' use of the funds and their compliance with executive compensation restrictions, and the prickly issues of bonus and counterparty payments at AIG. These counterparty payments at 100 cents on the dollar, including $13 billion to Goldman Sachs, are a potentially explosive issue that got lost in the furor over the bonuses.

No wonder that Goldman Sachs
GS, -0.78%
CEO Lloyd Blankfein and J.P. Morgan Chase
JPM, -0.51%
CEO Jamie Dimon are scrambling to get out of TARP and to stay away from the bailout. This kind of accountability is not something to which they willingly subject themselves.

But Barofsky is not likely to be deterred. When he asked Treasury to get an accounting from the banks of just how they used the TARP funds they received, the department answered that such a procedure would be too impractical and time-consuming to be worthwhile.

So Barofsky did it himself, and, as he breezily told NPR this week, he got a 100-percent response rate. "I think one thing that is very, very clear from our early responses -- it's not impossible; it's not impractical." Besides, he added, he got a lot of detailed information that will help understand what this TARP money actually accomplished.

No more gravy train

The administration doesn't like Barofsky, complaining that his zeal will keep banks from signing on to TARP. What started out as a gravy train is now starting to look like, well, a responsible government program, so the bank executives who created this mess are understandably reluctant to get involved.

But Congress likes Barofsky. In late March, both houses unanimously passed a bill introduced by Sen. Claire McCaskill, D-Mo., that gives the special inspector general even more power and immediately releases his $50 million budget.

Among other things, the bill expressly authorizes Barofsky to initiate criminal investigations without prior clearance from the Justice Department. It also requires the Treasury secretary to address deficiencies identified by the inspector general, or to certify to Congress that no measures are necessary. Read more.

The bill was sent to the White House last week for signature, but between Latin American summiteering and Iowa electioneering, President Obama has not yet had a chance to sign it. In any event, it will become law after 10 days, but it will be interesting to see if the president shows support for this type of accountability by actually signing it into law.

With his budget money freed, Barofsky will be able to ramp up his staffing, which for now is targeted at 150 full-time employees. Then watch out for those teeth.

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